Current ratio or working capital ratio, Financial Econometrics

Assignment Help:

Current ratio (CA) or working capital ratio

CA = Current assets/Current liabilities (times)

Current ratio measures the short term solvency or liquidity; it signifies the extent to which the claims of short-term creditors are covered by assets. Current ratio is basically looking at the working capital of the company. Effective management of working capital ensures that organisation is running efficiently. This will ultimately result in increased profitability and positive cash flows. Effective management of working capital involves low investment in non-productive assets such as trade receivables, inventory and current account bank balances. Also maximum use of free credit facilities such as trade payables ensures efficient management of working capital.

Normal current ratio is around 2:1 however this varies within different industries. Low current ratio may indicate insolvency. High ratio may indicate not maximising return on working capital. Valuation of inventories would have an impact on the current ratio, as will year end balances and seasonal fluctuations.

The use of ratios

  • To compare results over a period of time
  • To measure performance against other organisations
  • To compare results with a target
  • To compare against industry averages

We will now look at some of the working ratios in detail and illustrate how they can be interpreted.


Related Discussions:- Current ratio or working capital ratio

Describe the terms of the merger, Consider a recent merger between two majo...

Consider a recent merger between two major corporations. Describe the terms of the merger (cash or stock, premium, changes in management / directors, etc.). Explain the motivation

Financing, Financing Throughout the life of this Company, Dwight is p...

Financing Throughout the life of this Company, Dwight is proud of the fact that he has never before required any outside financing--other than his line of credit. The line of

Working capital cycle for a trade, Working capital cycle for a trade ...

Working capital cycle for a trade Inventories days (time inventories are held before being sold)   +   Trade receivables days (how long the credit

The variance of the returns on rt inc. stock, Question If the economy b...

Question If the economy booms, RTF, Inc. stock is expected to return 10%. If the economy goes into a recessionary period, then RTF is expected to only return 4%. The probabilit

Foreign direct investment project, The new investment has been under consid...

The new investment has been under consideration since the beginning of January 2008 when the new government of Gujistan first invited companies to submit their proposals to build a

Options, Four European vanilla Call options ()iC· on an underlier with no i...

Four European vanilla Call options ()iC· on an underlier with no interim cash flows, have identical maturity T. Their strike prices iK are such that 1234KKKK A trader buys ()1CK an

Find out the portfolio weight, Question You have a portfolio consisting...

Question You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 10.2%. Stock A has an expected return of 12% while stock B is ex

What is propulsion division, In May 2003, Gencorp acquired Sequa Corp.'s pr...

In May 2003, Gencorp acquired Sequa Corp.'s propulsion subsidiary ARC for $133million in cash and $11 million in transactions costs. Table below lists selected information about

Conservative policy - working capital policy, Q. Conservative policy - work...

Q. Conservative policy - working capital policy? All the non-current assets,permanent assets and some of the temporary current assets are financed bylong-term finance. £90m lon

Microeconomics, appraise the Baumol''s sales revenue maximization theory as...

appraise the Baumol''s sales revenue maximization theory as an alternative objective of the firm o

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd